Reserve Bank of New Zealand (RBNZ) Governor Alan Bollard this morning defended the credibility of the RBNZ, hitting back at criticism from the BNZ's Stephen Toplis' earlier interview on Radio New Zealand Morning Report. "Like it or not, the RBNZ is one of the most credible [central banks] in the world in terms of inflation fighting," Bollard said. "You just heard Stephen Toplis protesting a bit much, he got his forecasts wrong," he said.
Earlier, Toplis had criticised the central bank for not being transparent enough and for creating an environment of uncertainty with its announcement of a 50 basis point cut in the OCR instead of 25 basis points, as most economists were expecting. "There's this fear that [the announcement is] going to generate this psychology now that rates are going to be slashed, they're going to keep being slashed, and the world's going to be saved. That's probably not the environment that we need right now," Toplis said. "[The central bank] should be fully transparent, everyone should know where they're going. No surprises," he said. In response, Bollard said that the markets "shouldn't forget that central banks have got more than just a 25 basis point cut or increase in their tool kit. Of course they've got 50 basis points. We've seen the Federal Reserve doing that aggressively over the last year." "We got criticised for only pushing up rates by 25 basis points on the upswing, so it's a little bit ironic to get criticised for occasionally doing a 50 on the downswing," Bollard said. Toplis critisised the central bank for creating confusion and for having inconsistencies in its latest monetary policy statement. "One of the comments that was made by the central bank yesterday in its report was that they were lowering rates by 50 basis points and doing it under the assumption that the currency wouldn't fall aggressively. Now I don't know anybody who would have made the judgement that the currency wouldn't fall aggressively on such a suprise move, in fact, that's what it's done, so again we're back into that period of uncertainty as to has it dropped too much?" Following the Toplis interview interview on Morning Report, Bollard said that future cuts would be limited by how much the New Zealand dollar falls. "We are limited on how much we can cut if the New Zealand dollar falls very far because that does bring in inflation and it should be absolutely clear to everybody from our announcement yesterday we are still focussing and targeting medium-term inflation," Bollard said. When asked whether he thought the RBNZ is moving away from its core focus of restricting inflation, Toplis answered that he didn't think so. "What has concerned us, and continues to concern us is the ability for the bank to confidently push inflation to the mid-point of its target," Toplis said. "When you take away the emissions trading system impact, the bank only gets inflation marginally above the mid-point of its target band during the worst recession we've seen in 20 years," he said. "So if you can only get it to the mid-point in the worst recession in 20 years, what does that mean for the rest of the economic cycle?" In his criticism of the central bank's monetary policy report, Toplis argued: "For example, if you really believe the economy's unstuck, and you really believe that you need to lower interest rates, wouldn't you lower your entire interest rate track? Whereas, in fact, the Reserve Bank's published interest rate track at the end point is higher than where it used to be. It's 50 basis points higher, not lower," Toplis said. On the RBNZ's ability to communitate monetary policy intentions, Toplis said "it's all about casting impressions on where you're going in the medium-term." Bollard replied that the markets did know generally what direction things were going in. "They did, and they do know the direction," he said.